Prudential, Morningstar Beat Robo-Adviser Lawsuit

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Jacklyn Wille

Prudential and Morningstar have escaped a lawsuit claiming their 401(k) plan robo-adviser intentionally steered investors toward higher-cost funds that pay fees to Prudential.

The proposed class action failed to show that the defendants engaged in illegal racketeering activity under the Racketeer Influenced and Corrupt Organizations Act, a federal judge ruled March 16. There was no indication the defendants engaged in an “ongoing, structured enterprise” in which they pursued common goals as opposed to their own affairs, the judge said.

The lawsuit seeks to represent up to 5 million investors in “hundreds” of retirement plans that used the GoalMaker robo-adviser designed by Morningstar and offered by Prudential. The investor who filed suit says the defendants tweaked GoalMaker to intentionally steer people toward higher-cost funds that earned extra fees and kickbacks for Prudential.

Robo-advisers are automated platforms that provide investment advice to retirement plan participants and individual investors. Independent robo-advisers have grown in popularity; established players in the retirement industry such as Fidelity, Vanguard, and Charles Schwab have developed and offered robo-advisers of their own.

Judge Virginia M. Kendall of the U.S. District Court for the Northern District of Illinois wrote the decision. Despite dismissing the case, Kendall gave the investor another chance to state his claims.

The investor was represented by Nix Patterson & Roach LLP, Schneider Wallace Cottrell Konecky Wotkyns LLP, and Law Offices of Michael M. Mulder. Morningstar was represented by Jenner & Block LLP. Prudential was represented by Pullman & Comley LLC and Sidley Austin LLP.

The case is Green v. Morningstar, Inc., 2018 BL 90773, N.D. Ill., No. 1:17-cv-05652, order dismissing case 3/16/18.

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